Japan's government stuck to its assessment that the economy is slowly picking up in a monthly report, but said it is remaining vigilant about risks from a slowdown overseas, volatile markets and Europe's sovereign debt crisis.
The government cut its view on corporate sentiment for the first time in two months, saying sentiment among large manufacturers is weakening and that it is necessary to be cautious about the future as a strong yen and Europe's woes threaten external demand.
The government also acknowledged that a summit this month in Europe has failed to quell fears about some European countries' public finances, which could be another worry for Japan as it compiles next fiscal year's budget and a proposal to raise the sales tax.
"The Japanese economy is still picking up slowly, while difficulties continue to prevail due to the earthquake," the cabinet office said in its December report, released today.
The government downgraded its view of corporate sentiment to reflect the Bank of Japan's tankan survey, which last week showed that the mood among manufacturers was more pessimistic than economists had forecast.
Japan's economy will continue to recover in the future, albeit slowly, the report said, as a bounce in production following a recovery in supply chains fades away.
A European summit deal to strengthen budget discipline in the euro zone has largely failed to ease concerns about the continent's two-year old sovereign debt crisis, which is reflected in a slumping euro and rising bond yields.
The government delayed the release of this month's economic report by two days as it rushed to respond to the death of North Korean leader Kim Jong-Il. The report does not take Kim's death into account, but it could pose risks to Japan's economy if the Korean peninsula fell into chaos.
Europe's crisis and the yen's relentless strength prompted economists to again sharply downgrade their outlook for Japan's export-reliant economy, a Reuters poll showed last week.
For the first time, economists predicted a contraction in the fiscal year that ends in March 2012, by 0.4 per cent, instead of moderate growth.
Forecasts for 0.1 per cent growth in the current quarter and 0.4 per cent in early 2012 mean that the world's third largest economy will skirt the technical definition of recession - two consecutive quarters of contraction.
The government repeated its view that exports are levelling off and also stuck to its assessment that factory output is picking up. It kept to its view on private consumption, saying it is almost levelling off.
Reuters
